Evergreen Ltd has just issued a fixed coupon (10%) bond that matures in 5 years (notional principal
Question:
Evergreen Ltd has just issued a fixed coupon (10%) bond that matures in 5 years (notional principal 1 million). The first interest payment is due in exactly 180 days. Evergreen Ltd would like to hedge the interest rate exposure regarding the bond issue using interest rate swaps. Evergreen Ltd has agreed to enter into a swap contact as a floating rate payer at 180-day JIBAR + 3% in exchange for 11% fixed-rate receipt on notional principal required. The risk management team forecasted the following 180-day JIBAR rates :
Current: 8%.
In 180 days :9%.
In 360 days :10%.
In 540 days : 7%.
A). what is Evergreen Ltd.'s current exposure regarding the fixed coupon bond issue? (not more than 3 words)
B). Based on the interest rates forecasted by the risk management team, compute the expected net receipt /payments (from the bond issue and the swap transaction) over the desired hedging period.
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk